An oligopoly is a market structure where a small number of large firms dominate an industry. These firms have significant market power but unlike a monopoly they compete with each other. Within oligopoly theory there are collusive and non-collusive models.
Non-collusive oligopoly models describe situations where firms compete independently without forming agreements or cartels. These models explain how firms set prices and outputs while anticipating the reactions of their competitors.
This topic explores the major non-collusive models in oligopoly their characteristics and their implications for businesses and consumers.
What Is a Non-Collusive Oligopoly?
A non-collusive oligopoly occurs when firms in a market do not engage in price-fixing agreements or formal collusion. Instead they make independent decisions regarding pricing production and marketing while considering potential reactions from rivals.
Unlike collusive models where firms coordinate strategies to maximize joint profits non-collusive models assume that firms act strategically but independently leading to competitive behaviors such as price wars product differentiation and advertising battles.
Characteristics of Non-Collusive Oligopoly
- Few dominant firms – A small number of firms control the majority of the market.
- Interdependence – Each firm’s decisions are influenced by the expected reactions of competitors.
- Barriers to entry – High entry costs prevent new firms from easily entering the market.
- Price rigidity – Prices tend to be stable due to the fear of triggering a price war.
Major Non-Collusive Models Under Oligopoly
Several economic models explain how firms behave in a non-collusive oligopoly. The most prominent ones include:
1. The Cournot Model (Quantity Competition)
The Cournot model developed by Antoine Augustin Cournot describes an oligopoly where firms compete based on output quantity rather than price.
Key Assumptions:
- Firms choose how much to produce independently.
- Each firm assumes its rival’s output remains constant.
- Market price is determined by total output.
Implications:
- Firms adjust their production based on their competitor’s output decisions.
- The market reaches a stable equilibrium where no firm wants to change its output.
- Prices tend to be higher than in perfect competition but lower than in monopoly.
Example:
If two bottled water companies dominate the market each firm will decide how many bottles to produce considering the other firm’s output. If one increases production the market price falls impacting both firms’ profits.
2. The Bertrand Model (Price Competition)
The Bertrand model developed by Joseph Bertrand describes a situation where firms compete on price rather than quantity.
Key Assumptions:
- Firms produce identical goods.
- Consumers always buy from the firm offering the lowest price.
- If firms charge the same price they share the market equally.
Implications:
- Firms continue lowering prices until they reach marginal cost similar to perfect competition.
- Price competition leads to lower profits than in the Cournot model.
- If firms offer identical products price wars can drive profits to zero.
Example:
If two airlines operate on the same route they may lower ticket prices to attract passengers. This can lead to aggressive price competition reducing profits for both airlines.
3. The Kinked Demand Curve Model (Price Rigidity)
The kinked demand curve model proposed by Paul Sweezy explains why prices in oligopolistic markets remain stable despite changes in costs or demand.
Key Assumptions:
- If a firm raises its price competitors will not follow causing a loss of customers.
- If a firm lowers its price competitors will follow leading to no significant market share gain.
- As a result firms tend to avoid price changes.
Implications:
- Prices remain sticky even if production costs change.
- Firms rely on non-price competition (advertising branding product differentiation) rather than price reductions.
- Price wars are less frequent compared to the Bertrand model.
Example:
Gas stations in a town often keep prices stable. If one raises prices customers shift to cheaper competitors. If one lowers prices all stations match the reduction minimizing competitive advantage.
4. The Stackelberg Model (Leader-Follower Competition)
The Stackelberg model introduced by Heinrich von Stackelberg describes an oligopoly where one firm takes the role of a market leader setting output first while others act as followers adjusting their production accordingly.
Key Assumptions:
- One firm (the leader) makes decisions first.
- Other firms (followers) react to the leader’s decision.
- The leader has a competitive advantage by influencing market conditions.
Implications:
- The leader firm earns higher profits than followers.
- Followers produce less than they would in Cournot competition.
- The market does not reach perfect competition but is less restrictive than a monopoly.
Example:
A major smartphone brand (leader) launches a new model. Smaller brands (followers) wait to see the leader’s pricing and features before setting their own strategies.
Comparing Non-Collusive Oligopoly Models
| Model | Competition Type | Key Feature | Market Outcome |
|---|---|---|---|
| Cournot | Quantity | Firms adjust production based on rivals’ output | Medium prices stable output |
| Bertrand | Price | Firms compete aggressively on price | Prices close to marginal cost |
| Kinked Demand | Price Rigidity | Fear of price wars leads to stable prices | Prices remain sticky |
| Stackelberg | Leader-Follower | One firm takes the lead others follow | Leader gains advantage |
Real-World Applications of Non-Collusive Oligopoly
1. Airline Industry
- Competing airlines set ticket prices while considering rivals’ reactions.
- Companies often match fare reductions but avoid unnecessary price cuts.
2. Telecommunications
- Mobile network providers compete in pricing service quality and promotions.
- Price reductions are rare but firms differentiate through data plans and service packages.
3. Automobile Industry
- Car manufacturers like Toyota Ford and Volkswagen compete based on model features technology and branding rather than direct price cuts.
- Leading firms often act as Stackelberg leaders influencing the industry.
Non-collusive oligopoly models explain how firms compete without formal agreements. Each model—Cournot Bertrand Kinked Demand and Stackelberg—illustrates different competitive strategies.
While price competition can lead to aggressive pricing (Bertrand model) firms often prefer stable prices (Kinked Demand model) or compete through product differentiation (Cournot and Stackelberg models).
Understanding these models helps businesses develop effective pricing and output strategies in competitive markets. Whether in airlines telecom or automobiles non-collusive oligopoly remains a key factor in modern economics.
